Publications: The Petroleum Economics Monthly

The Unnoticed Disruption and the Outlook for Crude (April 2016)

Wildfires in Canada, attacks on pipelines in Nigeria, and economic collapse in Venezuela have combined to create the eleventh serious crude oil supply disruption in forty years. Markets are behaving in this disruption as they have in all but one of the previous episodes, and prices have risen by the same magnitude. The most recent event is identical in all respects save one: no one has noticed. Instead, the crude price rise has been attributed to "market rebalancing." Commentators increasingly declare "the worst is over for the oil market" (or "the best" for consumers). OPEC members met the first week in June and celebrated the success of their efforts to drive high-cost production from the market. Few others noticed, however, that world output had been seriously reduced.

Collectively the market forces at play all point to continued low oil prices. In this report, we argue that oil will move close to the historical average of $34 per barrel set over the last one hundred and fifty years and that oil prices could easily spend years around this level. Simulations with our "but-for" model point to a significant decline in prices in 2017 once the volume of unplanned production outages is reduced. Currently, there is as much as a $25-per-barrel premium in these markets tied to the disruptions. While this is not the consensus view, it is supported by the data.